SSI workstream - Financing sustainable shipping: save as you sail

1. Financing Sustainable
Shipping
With Knowledge
Partners

2. Overview & process
The findings
Member & stakeholder stories
What’s next & resources
Contents

3. The challenge we chose is financing retrofit of cost-
effective, proven technologies
Fuel, carbon and
cost savings
opportunity
Barriers to
retrofit
Innovation
opportunity
Future carbon
savings
Information: performance, owner rates of return through hire rates
Market-based: split incentive between time charterers and owners
Trends: shortening time charters, high fuel price, sulphur regulations
Inflexible finance options: main routes are cash or mortgage extension
– less available after financial crisis
DNV: 40% of predicted carbon emission in 2030 could
be avoided with cost-effective technology
Work together  understand
the problem  create solutions
This could reduce
sector emissions
by 1% or more

4. The goal for Save As You Sail
The shipping industry has tools for
informed, transparent negotiations,
guarantee savings and third party
financing to enable large-scale uptake
of innovation, technology, design and
operational efficiencies in the short-
term time charter market

5. What the SSI has achieved
Members of the financing
work stream have worked
together to develop Save As
You Sail (SAYS) – a robust
financing package that will
enable both owners and
charterers to benefit from
efficiency upgrades with
transparent understanding of
expected savings, and new
financing facilities to fund
upfront costs.

6. Save As You Sail explained
How SAYS works
• Time charterers save fuel costs and pays a
proportion (e.g. 50%) of the expected savings to
the owner as an ‘efficiency premium fee’
• Owner has fixed-rate loan available for 80% of
the cost of the retrofit. Owner’s loan instalments
are lower than the efficiency fee
Benefits of SAYS
• third party retrofit financing for owners in the
short-term time charter market
• successive charters possible during financing
period
• transparent understanding of fuel cost savings
for hire negotiations
• charterers lower overall costs through fuel cost
savings and reduce risk through improved
performance warranties
• technology performance guarantees provided
offered to owners by some providers

7. A worked example…
$5.5k / mo
$5.5k

8. Why is this important
Why retrofit the existing fleet?
• Ship age: around 65-70% of ships are over 5 year old, and anecdotal evidence is that some
that are younger are already being retrofitted to improve efficiency, for example to be more
efficient at slower speeds. Without being retrofitted, these vessels may become uneconomic
to operate as charterers factor in fuel costs to the hire rates they are prepared to pay. This
could lead to the fleet being laid up and eventually scrapped at a younger age than the
historic trend
• Cost effectiveness: DNV’s analysis of fuel saving options concludes that 40% of carbon
emissions projected in 2030 (if the fleet stays with current technologies and operating
practices) could be saved with options that are cost effective today if they are fitted to existing
and new ships between 2010 and 2030
• In 2009 the International Maritime Organization stated that: A significant potential for
reduction of GHG through technical and operational measures has been identified.
Together, if implemented, these measures could increase efficiency and reduce the
emissions rate by 25% to 75% below the current levels. Many of these measures appear to
be cost-effective
Sources:
http://unctad.org/en/Docs/rmt2011ch2_en.pdf
http://www.dnv.com/binaries/Pathways_to_low_carbon_shipping_tcm4-420472_tcm4-428628.pdf

9. Why is this important
Why focus on short term time charter?
• It’s a prevalent type of charter: Of the bulk ships on the charter market, over
50% of the dry bulk and 10% of wet bulk ships are under time charter and that c.
70% of these are chartered for less than 24 months. Containerships level of TC
% is not known, but of those on TC over 80% less than 24 months
• This duration is important as under longer charters the charterer is incentivized to
invest in upgrading the vessels knowing that they will save costs on fuel that can
more than recoup the investment outlay before the end of the charter. This
charter-led investment model has been used by Maersk Line on its long term
chartered in fleet

10. Why is this important
Why new financial innovations?
Making new, competitive capital markets for retrofit available to the industry
Lack of flexible, suitable finance is holding back retrofitting. In a 2013 report on shipping financing Moody’s
highlighted lack of finance as a major barrier to vessel fuel saving upgrades.
Without SAYS and other approaches, such as that of the NGO Carbon War Room, making third party
financing available to this industry, the options to pay the upfront costs are limited to using company cash
reserves or an extension from the vessel’s mortgage provider. These are not open to all ship owners or
vessels due to financial circumstances and are not provided in a competitive market that drives the costs of
finance down.
Doing so using a package of simple changes that work for all parties
– The innovation in Save As You Sail is to package up several elements that make it easier to upgrade the
existing fleet. Each one alone is based on standard existing practices these are:
• a standard loan package but specifically for retrofitting
• financial cash flow modeling tools to increase transparency between owners and charterers and
enable calculations and sensitivity analysis,
• performance guarantees to reduce risks from savings not being realized due to underperformance
of the technology
• legal guidance on contractual terms needed
– Brought together, this forms an innovative attractive package that increases information availability,
reduces risks and enables savings to be shared removing potential split incentives.

11. Methodology
The work stream SSI Members took a collaborative approach building partnerships and working with
expert Knowledge Partners. Once the problem had been defined, we worked with University College
London to analyse the shipping market in more detail to guide us to create a solution that is both
scalable and widely applicable to the industry.
Using this and the knowledge and experience of the diverse companies involved in a series of
workshops, we developed the SAYS package. We tested the concept with owners, charterers, brokers
and NGOs beyond this group to refine it further by systematically identifying risks and opportunities and
creating solutions that made the upgrade option beneficial for all parties.
More focused work with Deloitte and Holman Fenwick Willan has produced a robust excel cash flow
modeling tool and identified the contractual arrangements required.
We are now promoting the opportunity to pilot SAYS and are in discussions with owners and charterers
to do this. We have also released the resources publically in an ‘open source’ so that finance and
technology providers, owners and charterers can use it as a basis for future upgrade financing at a
greater scale.
Define and
explore the
challenge
Workshops
to identify
solutions
Refine with
experts
Promote Pilot
‘Open
source’
SAYS

12. Why this approach (1)
Shipping is a complex market with many operating and chartering arrangements, long term and short
term cycles and long lead times for new vessels. We knew from collective experience that new ways of
financing, if kept simple, could unlock large scale efficiency improvements and that many technologies
were commercially viable but not widely used. But with this complex picture there was not one obvious
problem and solution to increase fuel efficiency through financing.
The problem of ‘split incentives’ is often quoted in trade media and anecdotally as the reason why fuel
efficiency improvements were being held back. This resonated with the work stream but we knew that
we needed to understand more about it. By collaborating together and external knowledge partners, we
were able to understand this more fully and understand that split incentives are one part of the problem
alongside lack of flexible finance, market information barriers and others. In this fuller knowledge, we
designed SAYS to address the part of the market that is most at risk of being held back by split
incentives and affected by the other barriers too – the short term time charter market. In short term
charters the charterer has little incentive to invest in fuel savings as the pay back period is likely to be
longer than their charter, but they would benefit from lower fuel costs, hence the split incentive. SAYS
is flexible and simple enough to be beneficial to other types of charter too but this wasn’t the focus of
our work to date.
Another important reason for working in this sub-sector was that other initiatives including the Carbon
War Room and PwC were tackling other parts of the market. We complimented each other’s
approaches and have shared understanding with each other regularly to help each other progress.

13. The workstream members identified potential barriers to the uptake of SAYS
from their collective positions as technology providers, banks, charterers,
owners, accountants, academics, NGOs and legal advisors. With this we have
identified the right set of tools and products to enable upgrade financing for the
existing fleet owners and new build, uniquely working for the short term time
charter market, and on many different technologies.
We are now working with several owners to further develop SAYS in pilots with
their fleet and have released financial and legal guidance in an open source
format. This open source approach is in keeping with the ethos of the SSI to
work together as an industry to enable everyone to benefit from innovations and
leadership. From the outset we have developed SAYS to work for the whole of
the shipping industry not just large companies, knowing that it is often smaller
fleet owners and those based in emerging markets that can benefit most from
more flexible financial solutions.
Why this approach (2)

14. The findings

15. The detail
The market is shaped to need retrofit of the time charter fleet
• 80% of ships under time charter are chartered for less than 24 months
• 70% of the world fleet is over 5 years old
There are cost savings and profits for fleet owners by increasing their fleet’s efficiency
• 40% of fuel costs and carbon emissions projected by DNV in 2030 could be avoided by using operating
techniques and fitting technologies that are already cost effective. (This is at a fuel price of $500USD/tonne,
the price now is over $600/tonne)1
• Bunker prices are high and sulphur regulations and global demand will push up prices
• More efficient ships fetch a premium - preliminary findings by Forum for the Future and UCL show that a
vessel that is has a 10% higher technical efficiency has on average a 5% higher charter rate1
• UCL’s research also shows that efficient ships tend to resell for higher prices
• To many companies an efficient fleet is a qualifier for the quality of their business
• Regression analysis by UCL demonstrates that there is a positive relationship between fuel consumption and
charter rate and that some vessel classes average 50% of the avoided fuel costs gained by the charterers
being incorporated into a higher charter rate they pay to owners2
Financing is a barrier
• Moody’s concluded that capital constraint is a key restriction on vessel upgrades by owners
1 http://www.dnv.com/binaries/Pathways_to_low_carbon_shipping_tcm4-420472_tcm4-428628.pdf
2 The method used controlled for market volatility, vessel size and age. Translating this
technical efficiency into daily fuel consumption does not always result in a similar extent of
difference in fuel consumption, e.g. due to differences in main engine (installed power). This
suggests that in some cases charterers are making decisions or remunerating also on
factors other than technical efficiency or daily fuel consumption.
3Reference in press
4 Moody's Investors Service 2013

16. Bring the right expertise together: a cross-sector team has made us more effective as a team and allowed us to draw on a
wealth of knowledge and experience. Meetings and workshops have been constructive, fruitful, always with a positive
atmosphere.
Small - medium ship owners will benefit most from SAYS: smaller owners often don’t have finance readily available for
retrofit, making it a more risky undertaking. The SSI Members recognised that to realise their vision SAYS and other solutions
need to work for the whole of the market not just large companies.
Total value is important: fuel efficient ships not only save fuel costs, raise higher charter rates, but also resale for higher
prices and are seen my many shipping companies as a qualifier for business
Split incentives are complex and not yet fully understood: the prevalence and impact of split incentives needs further
focus and research. The research uncovered other factors that could be as or more important in some situations.
The shipping industry is varied in how it shows leadership: some owners have been cautious about being involved in a
pilot, others see themselves as innovative and want to be at the forefront of how the industry works.
The proof of success will be uptake: we set out to develop something that the market could respond to commercially
based on the messages and findings on barriers. So if there is uptake we know that it can be scaled. If uptake is limited then
we will need to keep innovating and trying new ideas.
Success requires thinking beyond the project goal: our goal was to have at least one pilot but we needed to consider the
stages of learning from the pilot and scaling to a widely marketed offer to make the pilot contribute to the vision
Bringing this to the foreground has stimulated industry activity: we’ve noticed more interest in retrofit and financing
since we began this work, mainly due to our presence in the press.
What we have learnt

17. Member & stakeholder stories

18. Member quotes and stories
“Our motivation in the short term is to see if we can trigger change. Later on, it may be a
business opportunity for us. But we need a change of mentality and more of a long-term
partnership between owners and charterers.”
Gust Biesbroeck, Head of Transportation, ABN Amro
“Maersk Line’s focus on energy efficiency and carbon performance is key to maintaining
competitiveness in a volatile shipping market. For this reason we apply the same systematic
approach to energy efficiency and retrofit investment on our owned and chartered fleet. But one
company cannot do it alone. We are keen to see the development of industry-wide, market-
based solutions that create greater supply and demand of energy efficient vessels.”
Signe Bruun Jensen, Global Advisor, Maersk Line Environment & CSR
“Gaining charterers support for technology that can improve efficiency is critical in reducing
emissions from shipping. This new finance mechanism should significantly increase the uptake
of these technologies, improving vessel efficiency and reducing costs and emissions for the
shipping industry”
John Willsher, Intersleek Market Manager, International Paint Ltd

19. Stakeholder quotes
“The existing global fleet faces a two tier threat and this gap will to grow as new build ships continually
improve. But the retrofit solutions are out and in demand from charterers who face high bunker prices.
We’re confident that the Save As You Sail scheme will appeal immediately to ship owners as it makes
finance available and solves the problem of ‘split incentives’ with time charterers. It’s a win-win
proposition for owners.”
George Cambanis, Global Shipping and Ports lead, Deloitte
“It is becoming apparent that environmental regulation and the drive towards more fuel-efficient
tonnage are increasingly important issues in the shipping industry today. If the SAYS model goes on to
be widely adopted within the industry and provides a workable solution to bridge the financing gap for
eco-friendly retrofit, this will be a very significant and positive development in our view. As such, we at
HFW are delighted to be assisting with the drafting of the documents that will provide the legal frame-
work for the model.”
Jonathan Webb, Partner, Holman Fenwick Willan LLP
“Save As You Sail has huge potential to cut the emissions of shipping in profitable ways. Clearly, this is
important for the industry; The Carbon War Room and other NGOs are also looking at this issue from
complementary perspectives. The organisations behind SAYS are hugely credible, and we are serious
about making this work for owners and charterers. This is a significant new opportunity to show
leadership and increase all fleets, value and I urge owners to get in touch with our team through
ssi2040.org”
Jonathon Porritt, Founder Director, Forum for the Future

20. What’s next?

21. Remaining opportunities
1. Scale up the offer of retrofit financing with more financial institutions having
specific offers and expertise located across the globe in developed and
emerging markets
2. Develop new consortiums of technology providers and finance providers to
offer complete SAYS packages
3. Develop joint common performance guarantees that cover technologies
from multiple technology providers
4. Use a variation of SAYS to help the demonstration of earlier stage,
unproven technologies and to enable more retrofit in other markets to
compliment other financing models

22. If SAYS was used on 30% of all time chartered ships…
…these ships could save 20% each, reducing the
amount of fuel used in shipping, saving $2 billion a
year and 10 million tonnes of carbon dioxide
There is no information available on the proportion of the world fleet that is owner-occupied, and
therefore we can not derive how much is on charter and time charter. This makes it difficult to
quantify the savings potential of SAYS. However, if we assume that 50% is owner-operated and
50% chartered out, we can calculate the following scenario of carbon reductions through the
direct use of SAYS by 2030.
Beyond SAYS…
Other models are being developed and are available for voyage and owner-operated vessels
and long term time charters, including by the Carbon War Room NGO with PwC. SAYS can also
be adapted to be used in other sectors and for new build vessels. Together by the use of other
models and by collectively raising awareness we hope that we can at least realize the 40%
reductions that DNV analysis showed are already cost effective by 2030, or over 1% of total
global carbon emissions.

23. What’s next?
We are now working with several owners to further develop
SAYS in pilots with their fleet and have released financial
and legal guidance in an open source format to enable
others to use the concept in commercial practice, with the
expectation being that it will be widely used.

24. Be involved in the pilot
1. Higher value ship, attracting higher charter and
resale rates
2. Retrofit loan from ABN AMRO
3. Higher quality performance data to use in
marketing
4. Increased income during and after the loan
period
5. Support from 21 SSI members, Deloitte and
HFW
6. Dedicated SSI communications support to
showcase your leadership with articles and
presentations targeting top-tier channels

25. Resources for you
• A summary document that sets out SAYS in more details and includes two worked examples
• An excel model
• Contractual guidance summary
• Contacts with ABN AMRO to discuss financing options*
• Contacts with AkzoNobel and Wärtsilä to discuss technology options*
*SAYS can be used with other finance and technology providers
To access the resources visit www.ssi2040.org
To express interest in using SAYS contact ssi@forumforthefuture.org

26. www.ssi2040.org
Registered charity no:
GB 162 3473 19
Prepared by Will Dawson and Clare Martynski of
Forum for the Future
ssi@forumforthefuture.org
With Knowledge
Partners